Why media reports on profits annoy me a little….

Ryanair made a profit of €865 million in 2014. The Irish Times reports this figure and also notes “operating profits rose 65 per cent to €1 billion from €658 million”. Great news for Ryanair. The main reasons for increased profit seem to be a combination of lower fuel costs and increased passenger numbers. What sort of annoys me about such media reports – and all media seem to do this, not just the Irish Times – is that such reporting of numbers does not tell the full story.

Let’s take a brief look at more detail. In this example from Ryanair (or any company) on profits, we also need to consider the level of investment in assets. Forgetting about accounting for a moment, it is logical to think that if Ryanair for example acquired more aircraft, then it should be able to generate more profits due to increased passenger revenue. But, if we just make a statement like “profits rose by 65%”, this does not reveal the underlying assets.

The same Irish Times article reports that net assets (assets less liabilities) did in fact rise from €3.3 billion to €4 billion in the year. If we do a simple return on assets calculation (using operating profits), then for 2013 the return is 658/3300 = 19.9% and for 2014 it is 1000/4000, or 25%. This is a year on year increase in the return on assets of about 26%. This is a long way off the 65% reported increase in operating profit, and a lot more meaningful as it reflects the net assets (or capital) used. It is still a great improvement, but perhaps not so sensational a 65%!

2 responses to “Why media reports on profits annoy me a little….”

This is particularly true if the previous year was depressed for a one off reason – some sort of provision, or write off. The underlying profit might be the same but the press (the UK is just as bad) tend to report some sort of spectacular growth, turn around or improvement in the business when really its the same.
Really very msileading

or, infact, even worse when there is some sort of defined benefit pension scheme, that is only reflecting movement in the market value of the assets, or change in bond market sentiment which is used to establish the present value of the pension obligations